Improving markets and a weak dollar are attracting foreign equity to U.S. real estate markets. These investors are largely entrepreneurs and opportunity funds from virtually every industrialized country -- except Japan. Unlike institutional investors, which used to dominate foreign investment here by focusing mostly on the office sector, today's players bid on virtually all property types.

"The interest is as strong and as broadbased as it has ever been," says Simon Milde, chairman and CEO of Greenwich Group/Kennedy-Wilson International, a New York-based commercial brokerage arm that spun off from Kennedy-Wilson in June. Whereas activity in the past came in waves and was dominated by institutions from certain countries, "the surge in interest is from everywhere," Milde says. "There's a perception that real estate at the moment is cheap."

The opportunity to buy U.S. real estate at 40% to 60% of replacement cost exists just as more investors are looking to globally diversify their holdings, adds Christiane Feldhaus, vice president of Barrueta & Associates, Washington, D.C., and president of Washington, D.C.-based FIABCI-USA, the U.S. chapter of the International Real Estate Association.

"One of the main reasons for investing abroad is asset diversification, and the trend now is toward a global real estate portfolio in part because of the opportunities that exist," she says. "The U.S. market is gaining strength, prices in major markets like Washington, D.C., and New York compare favorably to other international cities and the dollar is cheap."

Gary Barth, managing director of New York-based Jones Lang Wootton, agrees there are better opportunities in the United States than other markets around the world, but adds that some institutional investors are not yet convinced that investments here are good plays.

Rocked by the freefall of values in the early 1990s and now facing currency losses, most institutions are still re-evaluating their strategies for real estate investment here. Some are still disinvesting, but others are back in the market on both a direct and indirect investment basis.

For now, wealthy individuals and entrepreneurs primarily from Germany, Hong Kong, Taiwan and Singapore are the active players. They are a major source of liquidity in a liquid market, and they represent an equity source for the industry's laggard sector -- CBD office buildings. Because domestic funds, REITs and now domestic pension funds are helping to drive prices up and yields down, some foreign players have teamed up with U.S. developers and investors to gain local knowledge.

According to the Association of Foreign Investors in U.S. Real Estate (AFIRE), a Washington, D.C.-based trade group that represents overseas institutions, direct foreign investment in U.S. real estate totaled $28.4 billion last year after peaking at nearly $35 billion in 1990.

"Last year's figure was not as high as I thought it'd be, but the recent activity is not reflected in the numbers," claims AFIRE chief executive Jim Fetgatter.

About half of AFIRE's members say they will increase their allocation to U.S. real estate.

The notable exception is Japan. Faced with record high unemployment, deflation and soft stock and real estate markets at home, Japanese investors continue to disinvest from the U.S. market. The Japanese disposed of more than $10 billion in assets in 1993 and 1994, including about $6.4 billion last year.

Some institutions, like the Dutch, are opting for indirect investment by acquiring shares of REITs.

"Today, we only buy REITs because they are more liquid, and we don't have to build up our own staff to manage the assets," says Ray Bottorf, president of U.S. Alpha Inc., a New York-based wholly owned subsidiary of ABP, Holland's largest pension fund with $110 billion in assets.

ABP has allocated $400 million to $500 million to U.S. real estate in the near term. By the year 2000, it wants to increase its real estate allocation to 10% of total assets from 7.5% today. Of that total, Bottorf says 30% -- or $3.5 billion -- will consist of U.S. real estate.

After two years of disinvestment, Dutch investors made $50 million in new commitments here last year to become the second-largest foreign holder of real estate with a $5.4 billion portfolio, according to AFIRE. Most of the plays were direct investments, the group reports.

Another European institution that's back is one of Sweden's largest pension funds, which is making direct investments.

"We're under-weight in the United States, and we regard the U.S. market as generally very attractively priced," says David Sherwood, U.S. investment manager of San Francisco-based SPP Investment Management, the institution's U.S. office. "With the down cycle that all North American real estate has been through, it's taken this long to gain a keen appetite."

Despite their disinvestment strategy, Japan has the largest foreign holders of U.S. real estate, with $9.8 billion, followed by the Dutch with $5.3 billion, the English with $4.4 billion and then Canada which has $3 billion.

"Germany is very liquid now; while most is aimed at East Germany, some is targeted for the United States," Barth says.

Led by wealthy individuals, investors are looking to diversify their investments, exploit the strong German mark and elude an additional 8% tax on income to help pay for infrastructure projects in the former East Germany.

Boston-based Berkeley Investments, which places investments for European and Middle Eastern institutional and noninstitutional investors, closed on a $200 million portfolio purchase of commercial and residential properties in the Northeast earlier this year. The acquisition was made on behalf of its German investors from a consortium of domestic banks.

"The currency imbalance really makes investments attractive, and there's a tremendous gap in yield expectations (3% to 4% for German investors, for instance, vs. 10%-plus for U.S. investors)," Park adds.

Atlanta was named as the most attractive city for foreign investment according to AFIRE members.

"Atlanta has had a tremendous run of German, Dutch and Swiss investors," says Charles King, president of Atlanta-based King Industrial Realty and president-elect of FIABCI-USA.

Backed by mostly German money, The Vinings Group purchased a 208-unit apartment complex in metro Atlanta for $6 million from a private, New York-based seller. The fully leased property was bought at a 10.5% cash-on-cash yield, says Peter Anzo, CEO of the Atlanta-based investment firm, which serves as general partner and manager of apartment properties it buys throughout the Southeast with German and Canadian partners.

TMW Real Estate Group, an Atlantabased firm that is almost exclusively backed with German capital, exceeded its investment allocation in the first six months of the year, says vice president of acquisitions David Pahl, refusing to give specific figures.

"There's been an uptick in demand because the (economic and regulatory) changes in Europe have made the U.S. look more attractive," Pahl says. "The demand will stay steady and strong as long as markets don't get overheated, which is already happening in some places."

German investors also are making big deals in New York, which was named the third most desirable market by AFIRE members.

"They look at New York and see that they can buy a building at as little as one-fifth of replacement cost and at prices that are inexpensive compared to their home countries," says Richard Baxter, managing director of New York-based Edward S. Gordon, adding that about half of the investors in New York City are foreign entities.

Peter Hausburg, chairman of New York-based Eastern Consolidated Properties, says he's starting to see foreign institutions return to the New York market to join this crowded field of entrepreneurial capital.

With savory market fundamentals and a weak dollar, foreign investors will continue to be major players here. But it won't be easy. With domestic pension funds and insurance companies more aggressive nationwide, foreign investors can expect lower yields.

"The markets are stabilizing, but they still represent a good value," concludes Milde. "Acquisitions are being made at 50% to 60% of replacement costs, which means the market still has a long way to go (up)."

What will they sell, and when will they sell it? This paraphrase of the famous inquiry made during the Watergage hearings could have described how many in the industry felt about the intentions of Japanese investors that bought during the late 1980s. But the answers are clearer today, with many Japanese banks and real estate companies selling their U.S. real estate assets.

Last year, banks and finance companies became more aggressive in dealing with problem loans, which total some $474 billion and threaten the country's banking industry. For example, Sumitomo Bank decided to take an $8 billion writedown in bad loans and record a $2.8 billion loss -- the first loss by a Japanese bank in 50 years.

Banks and finance companies accounted for about half of the $6.4 billion that moved last year, according to E&Y Kenneth Leventhal Real Estate Group, which has tracked Japanese investment here for 10 years. Total disinvestment more than doubled in 1994 compared to the previous year.

With demand for U.S. real estate strong, the firm says Japanese disinvestment in the last half of the 1990s could approach the level of Japanese investment during the last half of the 1980s.

"Demand for office product among U.S. investors is very high," says Jack Rodman, a Los Angeles-based E&Y Kenneth Leventhal managing partner. The firm estimates that U.S. institutional investors representing about $10 billion are interested in acquiring property held by Japanese banks and investors. "The average property last year sold for $0.56 on the dollar, compared to $0.50 on the dollar the year before."

Most of last year's sales were office and hotel properties and about half were in California. Among the recent major sales by Japanese finance and construction companies were the $75 million sale of the Aventine, a mixed-use project in La Jolla, Calif. Los Angeles-based Shimizu America Corp. sold the property to Atlanta-based Equitable Real Estate Investment Management Inc.'s Value Enhancement Fund and the $75 million sale of the Pan Pacific hotel and office complex across from the San Diego convention center. In New York, which had the third-highest level of disinvestment last year, Sanwa Bank sold One Financial Square to Paramount Group for $135 million.

Despite the disinvestment, Japanese investors and lenders have disposed of less than 10% of the $72 billion invested in the U.S. market since 1985 -- which could fuel this trend for some time.

However, questions still remain about whether Japanese life insurance companies also will sell. As large holders of U.S. real estate, these institutions haven't disposed of these assets.